VANCOUVER DOWNTOWNWINTER 2017/18 OFFICE MARKET

Larger Blocks of Space Virtually Non-Existent in Vancouver’s Downtown Core

VANCOUVER DOWNTOWNWINTER 2017/18 OFFICE MARKET

The Vancouver economy has been one of the strongest in Canada over thepast decade; according to the Conference Board of Canada, real GDP grewat approximately 3.2% in 2017, and at 4% for the five years prior to that.While GDP is expected to moderate in 2019, the substantial growth over therecent years has made its effects felt on downtown Vancouver’s officemarket.

Vacancy rates for all office classes in downtown Vancouver continued to fallin the last two quarters of 2017, from 6.4% to 6.2%. A year ago, thevacancy rate for all space classes was at 7.5%, so the decline in spaceavailability has been rapid. The vacancy rate for Class A office space iseven lower, at 5.1%.

Over the last half of 2017, the posted rates for average gross rents for alloffice classes climbed from $41.24/sf to $42.59/sf, and will likely continue torise as the market tightens further. Average gross rents for Class A space indowntown Vancouver are now over $50/sf. This is higher than anywhereelse in Canada with the exception of Toronto’s financial core, and on a parwith many major US cities.

Given these market conditions, over the next three years tenants will havean increasingly difficult time locating larger blocks of top-quality downtownspace. A new development cycle is now underway, but major deliveries ofnew space in the downtown core will not begin until sometime around 2021.

Development UpdateThe Exchange at 475 Howe Street is now complete. It has a total of354,000 square feet of office space, of which approximately 100,000 squarefeet are still available. All of this available space is seeing tenant activity.

Major new developments currently under construction include:

• 1575 West Georgia Street, a 42,000-square-foot condo project with fouroffice floors to be completed in Q1 2020.

• Burrard Place at 1280 Burrard Street, a 13-storey, 146,300-square-footbuilding to be completed early in 2020.

• Vancouver Centre II at 753 Seymour Street. This 33-storey, 380,000-square-foot building to be completed in 2021/2022.

• 402 Dunsmuir Street, a 147,000-square-foot in fill building to becompleted in 4Q 2019. The space has been pre-leased by Amazon.

Projects in the pre-leasing stage include:

• 601 Hastings Street West, a 227,000-square-foot building beingdeveloped by Morguard Investments to be completed in mid-2022.

• 1090 West Pender Street, a 450,000-square-foot building for whichzoning has been approved; it is being developed by Bentall/PrimeCanadian.

• 400 West Georgia Street, a futuristic, stacked cube 345,000-square-foottower developed by Westbank/Allied REIT and specifically designed toattract high-tech firms.

• 1133 Melville Street, a 550,000-square-foot tower being developed byOxford Properties; its plans call for some of the largest office floor platesin the city, most of which are approximately 20,000 square feet.

• Quadreal’s redevelopment of the Canada Post Office site at 349 WestGeorgia Street; plans include 512,000 square feet of office space as wellas a sizeable retail space, condos, and rental apartments.

• 320 Granville Street, a 355,000-square-foot strata project developed byBosa Development (see “Strata Development”).

Current Conditions – Vancouver Downtown Core

Market Analysis (all office classes) – Downtown Vancouver

• Vacancy rate for all classes of office space in downtown Vancouver 6.2% at beginning of 2018, down from 7.5% a year ago

• Total occupancy costs near record highs

• Substantial new developments being proposed, but still years away from being delivered to the market

Market Summary (all office classes) – Downtown Vancouver

Source: Altus Insite

Occupancy Costs for Downtown Class A Offices Soar

0%

2%

4%

6%

8%

10%

$20

$30

$40

$50

$60

$70

4Q08 4Q09 4Q10 4Q11 4Q12 4Q13 4Q14 4Q15 4Q16 4Q17

Vacancy (%) Average Gross Rent/SF

Average Gross Rent and Vacancy

0.0

0.5

1.0

1.5

2.0

2.5

4Q12 4Q13 4Q14 4Q15 4Q16 4Q17

Under Construction Deliveries

Construction and DeliveriesSquare Feet, Millions

Current Quarter

Prior Quarter

Year Ago Quarter

12 Month Forecast

Vacancy Rate 6.2% 6.4% 7.5%

Net Absorption (SF) 47,827 136,758 115,735

Average Gross Rent/SF $42.59 $41.25 $41.17

Under Construction (SF) 942,546 541,973 490,473

Deliveries (SF) 0 23,599 0

VANCOUVER DOWNTOWNWINTER 2017/18 OFFICE MARKET

3

Strata DevelopmentStrata office development may be set to take off in downtown Vancouver ifBosa Development’s recent sale of 15 floors of strata space in itsWaterfront Centre at 320 Granville Street is any indication. In Novemberof 2017, the developers were able to sell out the available space in justover three days at an average price of $2000 per square foot. The BosaWaterfront Centre is a 30-storey, 355,000-square-foot building; the top 15floors have been set aside for leasing, and the project is scheduled to becompleted in 2021. The selling price was unprecedented; for comparison,over the past two years the average selling price for strata space hasbeen approximately $700/sf.

The success of the project is due to strong tenant demand, low interestrates and a shortage of premium office inventory with large floor plates.What remains to be seen is whether this is the beginning of a trend, or anindication of how the market might function in the years to come. Withprices this high--both for lease and strata space--there is a real danger ofdriving some tenants out of the downtown market and to the suburbanareas of Metro Vancouver.

Suburban OverviewTenant opportunities are more abundant in Metro Vancouver’s suburbanmarkets, but vacancy rates are generally declining and the space that isavailable doesn’t always have access to rapid transit.

In Burnaby, the largest suburban submarket, the vacancy rate is currentlyrunning at 9.9%, and just over 230,500 square feet of space wasabsorbed in the last quarter of 2017. Average gross rents are in the $32/sfrange. There are three major developments soon to be delivered, addingapproximately 170,000 square feet to the city’s existing office inventory.

In Richmond, space absorption has been steady over the past year, andthe Class A vacancy rate is now 11.9%. There are no major developmentscurrently under construction.

Surrey has the highest Class A vacancy rate of the larger MetroVancouver submarkets, at 18.1%. Average gross rents are in the$29.90/sf range. Two major strata developments are pending delivery: the150,000-square-foot City Centre 2, and the 116,000-square-foot TPC atSouth Point.

Looking ForwardDemand for top-tier office space in Vancouver’s downtown core shouldremain strong over the short and medium term, but the supply will belimited until the next wave of buildings come online in 2021 and beyond.Tenants seeking larger blocks of contiguous office space will beparticularly challenged by the almost non-existent inventory, and askingrental rates will likely continue to rise.

Given the extraordinary success of the Bosa Waterfront Centre stratasale, there’s a good chance more of these projects will be advanced. Itremains to be seen just how extensive the demand is, and how muchspace users are willing to pay for these spaces.

For space users who don’t require a downtown address, some of the bestleasing opportunities over the next 3-5 years may be in the suburbanmarkets, where there are still larger blocks of contiguous space available.Tenants seeking other options should consult with their real estateadvisors for possible out-of-the-box solutions.

Recent Significant Transactions

Tenant Building Submarket Type Size (SF)WeWork 555 Burrard Street Downtown New Tenant 54,000Arista Networks Canada Ltd. 9100 Glenlyon Parkway Burnaby New Tenant 62,000Evonik Canada Inc. 3731 North Fraser Way Burnaby Expansion 36,000Spaces 565 Great Northern Way Vancouver New Tenant 45,000Splunk 555 Robson Street Downtown New Tenant 27,000 Jumpstart Games 106-112 East 6th Avenue Vancouver New Tenant 9,000Samsung 565 Great Northern Way Vancouver New Tenant 20,000Canada Drives 555 Burrard Street Downtown Expansion 20,000Finning International 565 Great Northern Way Vancouver New Tenant 29,000

Market Inventory SF SF Under Construction

SF AbsorbedThis Quarter

SF AbsorbedYTD % Vacant Average

Gross Rent/SFDowntown Vancouver 15,202,704 911,973 133,410 453,601 5.1 $50.87North Shore 1,089,137 0 -18,323 -95,216 13.0 $35.99Broadway Corridor 2,185,173 156,047 65,719 82,614 1.4 $42.64New Westminster 607,827 0 -18,124 -10,163 34.3 $35.28Burnaby 6,774,277 52,804 230,600 222,148 9.9 $32.13Richmond 3,064,218 0 16,657 -86,974 11.9 $26.44Surrey 2,529,157 207,798 25,416 50,179 18.1 $29.90Total Market 31,452,493 1,328,622 435,355 616,189

Market Statistics (Class A) – Metro Vancouver

Source: Altus Insite

Source: Devencore Research

VANCOUVER DOWNTOWNWINTER 2017/18 OFFICE MARKET

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